Despite the economic disruption caused by COVID-19, the residential real estate market has continued its upward climb. Pressures on home buyers have intensified. “Clean” offers without meaningful conditions – for financing, for the sale of an existing residence, or for inspection, by way of example – have become the norm.

Story continues below

In many cases though, unconditional offers are poor choices: they often result in purchasers being unable to close in time. But our courts have shown little empathy for failed purchasers, repeatedly holding that vendors have no obligation to accommodate purchasers by extending closing dates to relieve purchasers from their own breach of contract.

The message is that purchasers should tread with caution and strive to put contingency plans in place if financing or the sale of their existing home falls through. Where purchasers can’t close on time, vendors’ only obligation is to take reasonable steps to limit their damages. The rationale is that purchasers should not be responsible for the full extent of losses that the vendor could have reduced by acting reasonably.

The duty to mitigate starts with the vendor’s efforts to replace the original purchaser. When the vendor makes her claim for the difference between the original price and the new price, the court will closely scrutinize the marketing and sales process to ensure that the vendor has acted reasonably.

Buyers who fail to close may be responsible for more than the shortfall in purchase price. Recoverable damages embrace all reasonable costs incurred by vendors in dealing with the breach and mitigating their losses. These include carrying costs, maintenance outlays, property tax, realty commissions, legal fees, as well as staging and other reasonable expenses. This is in line with the basic legal concept that courts should restore vendors to the position they would have enjoyed had the purchaser not breached the contract.

In some cases, buyers cite falling markets, offering to close for less than the original price to which the parties agreed. If the vendor refuses the lower offer, the buyer may try to allege a failure to mitigate. But courts have consistently ruled that vendors have no duty to mitigate until after the purchaser’s breach of contract. This suggest that vendors can ignore revised offers.

Courts have also awarded vendors the full shortfall even in the face of an appraisal that is substantially higher than the price paid by the replacement purchaser. Here, evidence of falling market conditions may help justify why the replacement sale did not occur at the appraised level. But the overarching point is that the law is vendor-friendly. Again, the obligation of vendors to mitigate extends only so far as taking all reasonable steps to limit their losses. Having done so, they will not be penalized if those steps did not culminate in a full realization of their shortfall. Since the purchaser’s breach created the problem, courts will not scrutinize reasonable vendor decisions too harshly. Put another way, purchasers who breach contracts have limited rights to complain after the fact.

Most agreements of purchase and sale (including the standard OREA form) include a “time is of the essence” clause, meaning that parties must respect the deadlines in the contract. Courts have repeatedly enforced these terms, with the goal of maintaining certainty and predictability in our property transfer system.

It can take several years to get lawsuits to trial. But in uncomplicated cases where key facts are not in serious dispute, parties can seek “summary judgment”, a much quicker process that allows judges to decide cases without a full-blown trial. As it turns out, failed residential property purchases are often straightforward cases that are great candidates for summary judgment.

Recently, Blaney McMurtry, representing a vendor, achieved a successful summary judgment hearing in just six months from when the claim was launched. Purchasers who have failed to close should therefore not expect to exhaust the vendor with “litigation fatigue” in the hope of inducing favourable settlements.

Take-Aways

For the purchaser:

Given the strict approach taken by courts, purchasers should avoid unconditional transactions, especially if their ability to close depends on first selling their own property – and even more so if they lack a contingency plan. At a minimum, purchasers dealing with unconditional offers should try to negotiate the longest possible closing period.

For the vendor:

Vendors dealing with a failed closing should pay close attention to market conditions where the property is located. They should obtain at least one fair market value appraisal as of the re-listing date and retain a qualified real estate agent with local expertise.

Because courts will scrutinize the relisting and resale process, the Realtor should keep detailed notes of all steps taken to market and sell the property. In arriving at a listing price, the Realtor should carefully research comparable listings (both recently sold and current) and review community reports from the local real estate board. Where possible, the property should be well-staged with good photography and exposure to MLS. Given the court’s vendor-friendly approach to these cases, however, failure to complete any of these tasks may not be fatal to a vendor’s claim.

The bottom line:

Unconditional transactions will doubtlessly persist as long as the real estate market remains hot. The upshot is likely a continuing influx of failed closing lawsuits, most frequently determined in the vendor’s favour and often decided promptly by summary judgment. Purchasers should take these risks to heart: the courts will not impose a duty on purchasers to extend closing dates, as it would effectively be to condone breach of contract.

10 COMMENTS

  1. It would be against our freedoms to think/proceed with legislation to forbid or deny someone’s choice to make an unconditional offer or to force a Vendor to have a pre-listing home inspection.
    A Buyer has the right to offer a price and conditions of his/her choice.
    A Vendor has the right to choose whether or not to provide a pre-listing home inspection or home staging, and what price and conditions they are willing to accept.

    Better business practices/procedures that would make a difference to the current situation include:
    1) more reporting of failed closures and judgements against Buyers failing to close helps emphasis the seriousness to buyers);
    2) details/stats reported on the number of mortgage applications denied by the banks/mortgage lenders where Buyers were forced to find a super high interest” mortgage just to keep from defaulting. (Will those people be able to re-qualify for conventional mortgage in 6mo to a year? or will they end up defaulting on mortgage or selling. How will that affect market next year?)
    3) adjust rules to restrict delayed offer dates, (just as rules were changed years ago to stop no showings until a particular date);
    4) Buyers Agents allowed/advised to present offers in person or via video call;
    5) Listings at a price the Vendor will accept, avoid low ball teaser pricing. There will still be multiple offers, as there has always been, but only from qualified buyers.
    6) Current rules are that agents are only to show properties a buyer is qualified to buy. Showing properties with teaser prices of $100,000, $200,000 or more below market value are causing agents to break rules. (have you thought about that?)

    This definitely is more time and work for some agents. All parties need to be serious about the offer to purchase being made. It would eliminate many who are throwing offers on properties that have teaser price (with hope that they might get lucky) which only increases the number of offers to cause emotion of one buyer to go very high.

    We need to get back to best Professional Business Practices to provide the best services to both Vendors and Buyers. The highest price on a firm offer is not always the best service to our clients. If they have to go through the added stress and expense of a delayed or failed closing, especially when it could have been avoided. On flip side, having a Buyer not get their anticipated financing and having to find more money at a high rate of interest .. who would want that added stress and financial strain on their family?

  2. I believe the Ontario government is looking at creating legislation designed to make this tactical procedure illegal in Ontario.

      • From what I understood the news release to mean, the Ford government is looking at ways to make the apparent underpricing, blind-bidding, auction-style sale of residential real estate—as exercised by Realtors—illegal. To my mind free enterprise is still a legal concept in Canada. Any home owner can sell his/her property any which way he/she likes…without the participation of a real estate brokerage. The key seems to be real estate brokerage involvement.

        It will be interesting to see what evolves legislatively—if anything—from this current short-term wild-west show.

  3. A buyer can say no thanks to a competing offer. Waiting to see if it sells at the offer date, could save the buyer a lot of money. If it really is overpriced it won’t sell. If it is sold for more than a buyer wants to pay, they have only lost some time. Can you now see what realtors have been taught about defining market value. Listing agents are working for the seller that pays the commission. Did you think that will ever change? The only change is now we call a vendor a seller

  4. A good realtor would advise their clients that are buying to try and limit the conditions that would be in a offer by doing preemptive home inspections, preemptively ensuring the house can be insured etc. And when it comes to a finance condition, the obvious solution is to have a firm offer on your own home and then search for a new property. But many of those buyers complaining about the market are trying to time the transition perfectly in their favour. Buy a house with a long close to lock up the price, and then sell your own house a month later to maximize the market growth in that time. Everyone is upset with multiple offers when they are buying, but then they expect it when they sell their own house. The true market value of a home has nothing to do with the list price, it is simply how much someone is willing to pay for it. First time buyers do have it rough, I agree. But at the same time, if you know houses are selling 200k over list and your budget is 700k….don’t look at properties listed at 700k or even 600k! Again, a good realtor would know how to lower their clients’ absurd expectations of getting a house for 700k when the same house across the street was just sold for 900k. Is it hard work? Of course! But that’s why you hire a good realtor.

  5. While I applaud this thoughtful and timely article, I wonder if the correct nomenclature in the title should not read “sympathy”. See the excerpt below:

    “The Difference Between Empathy And Sympathy
    by TeachThought Staff
    What’s the difference between empathy and sympathy? There is one, and it’s pretty important.
    In brief, empathy is feeling with or alongside someone, while sympathy is feeling sorry for, (which Brene Brown, research professor at the University of Houston Graduate College of Social Work, explores in the video below.) Brown reduces the difference between empathy and sympathy as the difference between feeling with and feeling for, calling empathy a ‘sacred space’ and a ‘choice.’
    Formal Dictionary Definitions
    Oxford Dictionary defines sympathy as, ‘Feelings of pity and sorrow for someone else’s misfortune.’
    Example of sympathy: They had great sympathy for the flood victims
    If that were to become something more empathetic, it might read, ‘They could understand the range of emotions and loss experienced by the flood victims and how those emotions changed over time based on their experiences.’
    Of course, empathy is a huge challenge and sustained empathy is more or less impossible. If you’re spending all of your time imagining someone else’s feelings, they become your feelings.
    According to Oxford Dictionary, a key difference between empathy and sympathy is that the latter involves a degree of judgment or evaluation–that the sympathizer assumes they know what another person might feel, and then extends that emotional experience to pity, for example.
    ‘Empathy means ‘the ability to understand and share the feelings of another’ (as in both authors have the skill to make you feel empathy with their heroines), whereas sympathy means ‘feelings of pity and sorrow for someone else’s misfortune’ (as in they had great sympathy for the flood victims)
    While the difference feels narrow, it is crucial: empathy focuses on a mutual and shared (albeit potentially asynchronous) emotional experience, whereas sympathy moves more swiftly from feeling with to feeling for.

  6. It blows me away that they just don’t get it.
    Realtors are intentionally under listing homes to trigger multiple offers. The vendor has no intentions of accepting asking price and most likely nothing even close which would resemble it.
    Then you have buyers and buyers agents showing this under listed home and bingo they want to make an offer. Now all the selling agent needs is another offer to trigger a “multiple offer” situation.
    It’s the process and it works all in favour of the seller. How is any buyer ever going to purchase a home with conditions? Never … oh but boy the advice given in this article just shows you how out of touch they are.
    Like I said before there only one way to stop this and the first would be every vendor should make a home inspection report available to all interested buyers and all offers should be disclosed to all interested parties.
    With today’s technology it just can’t be that hard.
    So quit with the BS and get it done REBBA …
    if not this process will never change.
    Even if the market slows down … the vendor will still get cash offers with no obligation to accept any, no obligation to accept the highest no obligation at all to do anything. It happens. The buyer has absolutely no protection at all.
    What exactly is a competing offer? An offer the vendor has no intention of accepting? No not really
    that is another offer but isn’t a competing offer it’s just a plug.
    Yes you get the picture. It’s simple you
    list low enough that you’ll create your “plug offer”
    and then wait for the other serious buyers and bingo you’ve got the stage set.
    no one gets to see the ridiculously low offers they were competing against … then a buyer hits a grand slam and goes in big because he thought the was competing … when in fact he really wasn’t
    It works so beautiful why would any listing agent not do this … because if he didn’t he should be reported to RECO for failing to provide a “Duty of Care” to his vendor.
    I love real estate …

  7. I wonder if a Buyer would have any recourse against their sales representative/Brokerage for not representing and promoting their best interests and protecting their client?

LEAVE A REPLY

Please enter your comment!
Please enter your name here